Federal Loan Basics

Federal Loans

Most student loans are federal government loans. Since 2010, most of these loans are made directly by the government. This is known as the Direct Loan Program. There are also many older loans made by private lenders, but guaranteed by the government. (also known as federal family education loans or “FFEL”). Guaranty agencies pay off the lenders when borrowers default, and in turn, are reinsured by the Department of Education. The National Council of Higher Education Resources (NCHER) also has a fact sheet with a list of guaranty agencies.

There are limits on the amount in subsidized and unsubsidized loans that you may be eligible to receive each academic year (annual loan limits) and the total amounts that you may borrow for undergraduate and graduate study (aggregate loan limits). The actual loan amount you are eligible to receive each academic year may be less than the annual loan limit. These limits vary depending on what year you are in school and whether you are a dependent or independent student. If you are a dependent student whose parents are ineligible for a Direct PLUS loan, you may be able to receive additional Direct Unsubsidized Loan funds. The Department posts information to help you determine whether you are a dependent or independent student.

The Department has a fact sheet with information about the different types of loans and borrowing limits.

The federal student loan programs are highly regulated by Congress and the U.S. Department of Education. The maximum interest rates, and many of the important terms of federal loans are set by Congress, and are similar in both the FFEL and Direct Loan programs. There are, however, a few important differences in available repayment plans for FFEL and Direct borrowers. For example, you must be in the Direct Loan program to qualify for public service forgiveness.

Do you have a private loan?

The good news about federal government loans is that there are many different programs available to help you if you are having trouble repaying these loans. There are even ways to cancel these loans in limited circumstances. The bad news is that the federal government has extraordinary powers to collect student loans if you default. These powers, such as tax refund and federal benefits offsets, have no time limit.

Stafford Loans

Stafford loans are for undergraduate, graduate and professional students enrolled at least half-time. Stafford loans may be subsidized or unsubsidized. A subsidized loan is awarded on the basis of financial need, and the government pays the interest before repayment begins or during authorized periods of deferment. Unsubsidized loans are not awarded based on financial need and borrowers are responsible for all interest.

The fixed interest rate for undergraduate Stafford loans first disbursed on or after July 1, 2018 and before July 1, 2019 is 5.05%. The rate for graduate students is 6.6%. Most older loans from before July 2006 have variable interest rates. After 2007, the interest rates are fixed, but change almost every year. The Department of Education web site has information about the fees the government charges when you take out a Stafford loan.

There are limits on the amount of Stafford loans you can borrow. Stafford loan limits vary depending on whether you are financially dependent or independent. The total amount of Stafford loans, including both subsidized and unsubsidized, that undergraduates can borrow is $31,000 for dependent students and $57,500 for independent students. Subsidized loans can be no more than $23,000 of this aggregate amount. The higher independent student limits also apply to dependent students whose parents are unable to borrow PLUS loans. The limits vary for each year of study, depending on the length of the program and the student’s year of study. There is more information on Stafford loan limits on the Department of Education’s web site.

Interest Rates for Newer Loans:

PLUS Loans

PLUS loans come in two varieties: 1) Parent PLUS loans are for parents borrowing for the education of dependent undergraduate children enrolled in school at least half time and 2) “Grad PLUS” loans are available for graduate and professional students.

For PLUS loans first disbursed on July 1, 2018 and before July 1, 2019, the interest rate is 7.60%. The Department of Education web site has information about the fees the government charges when you take out a PLUS loan.

Unlike Stafford loans, PLUS borrowers are generally required to pass a credit check. Unless the lender determines that extenuating circumstances exist, you will not pass the credit check if you:

Have one or more debts that are 90 or more days delinquent as of the date of the credit report, or that have been placed in collection or charged off (written off) during the two years preceding the date of the credit report, and the total combined outstanding balance of those debts is greater than $2,085; or

You have been subject to any of the following conditions during the five years preceding the date of the credit report: Repossession; Default Determination; Bankruptcy Discharge; Tax Lien; Wage Garnishment; or Write off of a federal student loan debt. (The Department has on-line FAQs about the PLUS loan credit check).

PLUS borrowers with poor credit may still get loans if they can find someone with a better credit history to co-sign. Lenders may have additional discretion to find “extenuating circumstances.” You will get a letter if your initial credit check is approved or denied.

Consolidation Loans

Consolidation is similar to refinancing a loan. You can consolidate all, just some, or even just one of your student loans. Consolidating federal student loans may be a good strategy to lower monthly payments or to get out of default, but it is not always a good idea.

Direct consolidation loans are now the only type of federal student consolidation loan. Under the Direct Loan Consolidation Program, you can consolidate just about any type of federal student loan into a new Direct consolidation loan. Loans that are not eligible for consolidation include state or private loans that are not federally guaranteed.

Interest rates for consolidation loans are fixed. The fixed rate is based on the weighted average of the interest rates on the loan at the time of consolidation, rounded up to the nearest one-eighth of a percentage point. The interest rate must not exceed 8.25% for consolidation loans prior to July 2013. Consolidation loan borrowers should not be charged origination fees.

Applying for a Consolidation Loan

You do not have to pay a fee or pay someone to help you get a government consolidation loan. Be wary of companies charging a lot of money for a free government program.

The Department generally requires all borrowers to apply for Direct Loan consolidation using the studentloans.gov web site. (Click espanol to find a Spanish version of the on-line application). The Department strongly encourages borrowers to apply on-line, but you may also download and print a paper application to submit by regular mail.

You can find out more about how to apply for a consolidation loan here. This is the section of this web siteabout consolidating out of default, but you do not have to be in default on your loans to consolidate.

Pros and Cons of Consolidation

With a few exceptions, you only get one chance to consolidate your government loans. You should consider the pros and cons of consolidation before starting the process. Among other potential down sides, you may lose important rights by consolidating. If you still want to consolidate, you don’t have to include all of your eligible loans. The Department gives this example: If you have both Direct Loans and other types of federal student loans, and you have been making payments toward public service loan forgiveness on your Direct Loans, you should not consolidate your Direct Loans along with your other loans. Leaving out your Direct Loans will preserve the benefits on those loans.

Joint Consolidation Loans

Prior to July 1, 2006, married borrowers could choose to consolidate federal student loans from both spouses or jointly consolidate the loans of either spouse. Both borrowers had to agree to be jointly and severally liable for repayment. (“Joint and several liability” means that both borrowers are fully liable for the full amount of the debt). This obligation continued even after divorce. Not surprisingly, this caused a lot of problems for borrowers and Congress eliminated the program as of July 1, 2006.

There are still many borrowers struggling with joint consolidation loans. There are numerous problems that can arise–for example, if one of the divorced ex-spouses wants to apply for income driven repayment. Problems often arise if the ex-spouses are no longer in contact.

Another common problem is that partial discharge of a joint consolidation loan under any of the discharge programs (other than death discharge) does not eliminate joint liability for the remaining balance. Further, borrowers with joint FFEL consolidation loans, according to the Department, may not reconsolidate into Direct Loans and therefore are not eligible for public service loan forgiveness.

Perkins Loans

There was also a Perkins loan program for many years. These were low-interest loans for both undergraduate and graduate students with exceptional financial need. Perkins Loans were originated and serviced by participating schools and repaid to the school. For now, there are no new Perkins loans being made. The Department has also posted information about the winding down of the Perkins program. This site has information about unique Perkins repayment and cancellation options.

Federal Grants

Although this site does not cover federal grants, it is important to know about the main grant programs and find out if you are eligible. Pell grants are the biggest grant program. These grants are for undergraduates only and tied to financial need. There a lifetime eligibility limit on Pell grants. This can be restored in limited circumstances, including if you get a closed school discharge.

In most cases, you do not have to pay back a Pell grant, but there are some limited exceptions including if:

You withdrew early from the program for which the grant was given to you;

Your enrollment status changed in a way that reduced your eligibility for your grant (for instance, if you switch from full-time enrollment to part-time, your grant amount will be reduced); or

You received outside scholarships or grants that reduced your need for federal student aid.

If you owe a grant overpayment and fail to pay or set up a payment plan, you will lose eligibility for future aid and possibly face collection.

You might also run into problems with repayment of TEACH grants. If you have a TEACH grant and you do not meet the conditions required for TEACH grants (mainly serving as a full-time teacher for the required time period in a certain type of school), your grant will be converted to a Direct unsubsidized loan. Due to problems and errors in this conversion to loan process, the Department has created a process for TEACH grant recipients in this situation to request reconsideration of the conversion from grant to loan.

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Please Note

Please understand that we do not provide legal advice about individual cases. This web site includes links to other resources for those who seek individualized legal advice or other help not offered here. This site is for people who already have student loans and want to know more about their options and rights.